Page 41 - Profiles's Unit Trusts & Collective Investments - September 2024

Basic Concepts

Foreign, Offshore and Global Funds
CISCA defines offshore CISs as “foreign investment schemes”. We prefer to call them
“offshore” schemes to avoid confusion with rand-denominated global funds. The term
offshore is also slightly problematic though. In other countries, it often has the specific
meaning of a tax haven, but in SA it is used to indicate any overseas-domiciled and foreign
currency-denominated investment. “Foreign” and “offshore” can be used interchangeably in SA.
An offshore fund (in our terms) is one that is not domiciledinSouth Africa butinanoverseas
jurisdiction. Offshore funds are usually euro-, pound- or dollar-denominated (ie, the base currency of
the fund is not SA rands). This differs from Global and Regional funds (as defined in the ASISA
classification system), which are rand-denominated SA-domiciled funds which invest mostly overseas.
South Africans can invest offshore by using the annual discretionary allowance of R1m per
annum or the R10 million offshore investment allowance. The latter was increased from R2m to
R4m per person in October 2009, and then further increased to R4m per person per calendar year
in November 2010. Since April 2015 the allowance is R10m per person per calendar year. No
documentary evidence needs to be presented to the authorised dealer (eg, the bank) to make use
of the R1m discretionary allowance but a tax clearance from SARS must be obtained before the
offshore investment allowance (ie, amounts exceeding R1m) can be moved overseas.

A similar classification system obviously applies to
offshore funds (ie, non rand-denominated funds). A collective investment scheme
An American mutual fund or UK unit trust can also be in participation bonds means a
portfolio
the
where
scheme
classified as “global” or “international” (investing all consists mainly of participation
over the world) or “regional” (investing in one country bond assets and in which investors acquire
or region). participatory interests in all the participation
Most major countries do not have exchange control bonds included in the scheme.
regulations, and as a result the major differentiation A “participation bond” is a mortgage bond
between local currency denominated funds and others over immovable property, and must be a first
(which we have in SA) is not common overseas. mortgage. Participation bond schemes by
Instead, funds disclose their domicile and their base law have a minimum investment period of
currency, which may be pounds, dollars, euros, or any five years.
other major currency. Prior to maturity, participatory interests in
bond schemes are traded on a willing-buyer-
Diversification and Risk willing-seller basis, which typically makes
them less liquid than other collective
Diversification is a cornerstone of nearly all
investment philosophies. Spreading investments across investments.
a range of shares or assets (ie, not putting all your eggs
in one basket) is the most basic method of reducing risk.
Different types of assets have different levels of risk. Money market instruments are very low risk
(and in fact certain instruments are described as risk free). Equities, on the other hand, are considered
fairly risky – some more so than others. Diversified industrial companies, for example, are considered
less risky than gold mining companies, which are typically at the “high end” of the risk spectrum.
Everyone understands that there is a risk associated with a high-yielding investment – namely,
the risk of something going wrong and losing part or all of one’s investment. But there is also a risk
associated with a conservative investment – the risk that one will not make a real return and that
one’s wealth will gradually be eroded by inflation.

Units and Participatory Interests
The term participatory interest is favoured under the Collective Investment Schemes Control
Act (CISCA) because the Act governs various types of collective investment schemes
(CISs). A CIS is not necessarily a “trust”, and can be a company or other structure. To quote from
CISCA, “Participatory interest means any interest, undivided share or share, whether called participatory
interest, unit, or by any other name…” It is not wrong, therefore, in terms of the Act, to talk about units in
a unit trust, or shares in listed property trust. All denote a type of participatory interest.

Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts 39